Level funding, a pivotal concept in the health insurance sector, refers to a financing solution where employers, primarily small businesses, pay a consistent and predictable ("level") monthly premium to provide health benefits to their employees. Originating as an alternative to traditional fully insured and self-funded health plans, it provides more flexibility and predictability for the employer than self-funding while saving most companies money compared to fully insured insurance premiums.
This approach utilizes stop loss insurance, safeguarding employers against catastrophic claim expenses, and allowing them to reap some of the benefits of unused funds in the form of a surplus refund or credit after the policy year.
In essence, level funding combines features of both self-funding and fully insured structures. An employer typically partners with an insurer and a third party administrator (TPA) to determine the monthly premium based on anticipated claims. Employers are responsible for claim costs up to a certain threshold, after which the stop loss coverage kicks in.
Third-party administrators (TPAs) play a crucial role in managing these plans, processing claims, and handling other administrative tasks. Notably, TPAs are well-versed in the nuances of ERISA and ACA compliance, ensuring the health plan aligns with federal law including the Affordable Care Act (ACA) regulations.
According to a report by the Kaiser Family Foundation, there’s been a surge in level funded plans, particularly among small businesses. This uptick stems from the allure of cash flow predictability and the potential of refunds on unused surplus funds.
Employers deposit monthly premiums into a claim fund. An insurance company calculates these premiums using underwriting. If claims are less than anticipated, the employer may receive a refund. Stop loss insurance shields the employer from exorbitant claims.
The primary boon of level funded plans lies in their affordability vs. fully insured options and predictability vs. self-funded options. Employers can budget with certainty. Moreover, TPAs offer more personalization, tailoring the health plan to the company’s and employees' specific needs. This fosters an enhanced employee health and wellness environment, leading to improved employee benefit packages.
However, drawbacks include potential increase in the next year's rates if claims surpass the stop loss coverage and the administrative burden on employers.
Small businesses often gravitate towards level funded plans due to their potential cost savings. When claims are low, employers can see a significant refund, bolstering their bottom line. This, combined with predictable premiums, leads to better cash flow management.
Employers have more autonomy, working with TPAs to curate a plan tailored to their workforce's unique needs. This can include specific coverage areas or wellness initiatives, positioning the employer as a more attractive option for potential hires.
While level funded plans have numerous advantages, they aren’t without risk. Employers need to fund claims up to the stop loss threshold. Their monthly cost through the contract year is capped, but unexpected high claim costs can increase rates the following year.
Companies with historically high claims might find fully insured plans more affordable. Additionally, businesses not equipped to handle the administrative demands might consider partnering with a comprehensive TPA or opting for a different healthcare plan.
The primary distinction between these two lies in risk and predictability. In self-funded plans, employers bear all the risk, paying out of pocket for claims. While this can offer greater potential savings, it’s also riskier. Level funded plans, however, integrate the predictability of fully insured plans with the flexibility of self-funded plans, cushioned by stop loss insurance.
These plans typically offer an amalgamation of features, focusing on predictability and flexibility. Employers work with carriers, paying a set monthly premium based on anticipated claim costs. TPAs, like Decent, offer assistance, ensuring that the plan abides by ACA regulations.
Unlike traditional plans, level funded insurance offers potential refunds for unused premiums. While traditional plans might be simpler, they lack the flexibility and potential cost-saving opportunities of level funded options.
Level funding presents an enticing alternative for employers seeking the middle ground between self-funded and fully insured plans. With potential cost-saving opportunities, consistency, and flexibility, it's worth considering for businesses of all sizes. We administer level funded plans at Decent, so if you're interested, be sure to contact us for more information.